The dollar moves higher as Middle East tensions build
Markets turn to today’s payrolls report as renewed uncertainty around Hormuz keeps risk sentiment fragile and the dollar supported.
USD
The dollar began the new week on the front foot, seeing the DXY firm back towards 99.8 in a partial reversal of Friday's post-payrolls drop. Monday's session was dominated instead by Middle East concerns after Iranian officials rejected direct talks with Washington over the weekend and attached fresh conditions to any reopening of the Strait of Hormuz. Oil remains bid this morning, with Brent now trading just shy of $90, offering greenback support through both haven and terms-of-trade channels. Given a light calendar today, with just NFIB small business optimism due, further US-Iran developments and tomorrow's July CPI report are likely to be the focus for traders. Regarding that latter release, consensus looks for a +0.1% MoM headline print after June's -0.4% contraction, enough to see both headline and core price growth slip 0.1pp on an annual basis. That, we think, would support our call for no Fed hikes this year, keeping dollar risks skewed asymmetrically downward in the near term.
EUR
The euro gave back a portion of its post-payrolls gains on Monday, though EURUSD remains close to two-month highs, and up 1.7% since late July. Unsurprisingly, a renewed rally in energy prices threatens an unfavourable terms-of-trade shock to the bloc just as domestic data has started to turn a corner, putting a ceiling on euro potential upside, absent a durable ceasefire. Today the calendar is light, with ECB speakers also thin on the ground in light of the European summer holidays, helping to keep Middle East risks and energy prices in focus. For now, we continue to see the pair stuck in a 1.15–1.16 range ahead of US CPI tomorrow.
GBP
Sterling was one of the few currencies to hold its ground against the dollar on Monday, with cable steady just shy of its one-month high, even as GBPEUR nudged above 1.17. The pound drew modest support from the REC hiring survey published early yesterday morning, which pointed to steady employment conditions in July, tempering some of the gloom around the UK labour market. That said, with markets heavily discounting no change in Bank Rate next month, the pound is left trading largely as a function of broader dollar direction and risk appetite today. No top-tier data is due before Thursday's monthly Q2 GDP figures, which should, we think, limit scope for further sterling gains today.
CAD
The loonie continues to trade with the wind at its back, helping USDCAD consolidate yesterday, after breaking below 1.40 in the wake of Friday's blowout Labour Force Survey. That report showed employment rising 75k in July with unemployment falling to 6.4%, although the cooling in permanent wage growth to 3.0% takes some of the hawkish edge off the data. Monday's surge in crude, driven by stalled Strait of Hormuz negotiations, is offering an additional tailwind for the oil-sensitive currency too. Looking ahead, with the domestic calendar empty today, the loonie should continue to trade off energy prices and broad dollar direction into tomorrow's US CPI. Trade headlines remain a key event risk, however, ahead of an August 19th deadline for US tariff decisions. All told, we see scope for further modest CAD outperformance while oil stays bid, though a hawkish surprise in US inflation or an adverse tariff outcome would likely see 1.40 quickly reclaimed.